by Emily Hechler 
Money can quietly shape the health of a marriage. Many couples split temporarily or permanently because of differences in money management. While some couples can work through different goals and priorities and come out with a stronger relationship, it’s better for others to part ways and gain independence. By being aware of common financial red flags, you can make safe decisions about separating your previously merged money. Then, you can learn about how to manage your money during and after divorce. Whether you’re trying to protect your finances, repair trust, or prepare for independence, understanding your options is the first step toward regaining control and confidence.
Do I Need to Separate My Money?
Money is one of the most common sources of tension in a marriage. Yet it’s rarely discussed openly until problems arise. Disagreements about money don’t need to end your relationship, but patterns can be signs of red flags of deeper underlying issues. If you think you need to separate your finances in your marriage[EH1] , consider these scenarios and the potential they have to undermine your trust and financial wellbeing.
Debt Trap
Having debt isn’t an issue itself. More than 77% of American households have some kind of debt. Even couples with strong marriages can have several thousands of dollars in loans. Debt can create issues in marriages when both spouses don’t agree on how the debt should be used. This can include how much debt they are comfortable borrowing at one time. It can also include opening a credit card without talking to your spouse about it first or getting a loan for larger amount than the agreed-upon amount. While cosigning for other friends and family is thoughtful, it can create strain on you and your spouse. This is due to the lack of communication and the possibility of paying off the risky debt for years. A debt trap like this is a warning sign that it could be in your best interest to separate your finances from your spouse.
Hidden Bank Accounts
When a spouse has a secret bank account, it’s often used to fund suspicious behavior and activities. While some couples choose to keep their finances separate, this specific secret account is not disclosed to the other spouse. By intentionally hiding money from your partner, you create distrust. This is especially true if the couple agreed to combine their finances. Secret accounts like this are a red flag that you need to reevaluate your joint financial plan.
Different Priorities
Many couples disagree on their priorities. Often, these priorities are tied to money management. Some disagreements can be resolved when the couple works on reevaluating their goals. However, unaligned priorities that remain unaddressed can create misalignment in how they manage their combined finances. This is especially true when the two came into the relationship in vastly different financial situations or if one makes significantly more or less income than the other. If you can’t compromise on your individual and family priorities, and your partner’s spending habits are forcing both of you to backtrack, you may need to discuss separating your finances.
Gambling Problem
When managed well, you can make room in your budget for gambling. However, a gambling addiction is a sign that you need to separate your finances. Gambling addictions are categorized similarly to substance abuse, which emphasizes the danger and lack of clarity of the user. The lost money or debt created from losing during gambling can cause years of debt or financial insecurity. Hidden gambling, high-risk betting, or addictive patterns are clear indicators that joint finances may need to be separated.
Protect Yourself and Your Finances
In these scenarios, you may be able to separate your finances temporarily while you and your spouse address any communication issues. If the issue is deeper, like an addiction, and puts your family in a vulnerable position, personal and financial counseling can help you work through the problems. However, you may eventually separate permanently via divorce. If this is your situation, keep reading to learn how you can manage joint finances and move forward afterward.
How Do I Manage Joint Debt?
Since many couples get a divorce due to finances, it’s common that joint loans are involved. While you hope that the divorce decree will split the loans how you would want, this isn’t always the case. One way or another, the lender needs to be paid what they are owed. There are three ways that joint debt can be split, through refinancing the loans, liquidating the assets, or paying the lenders in full.
Refinance Your Loans
A simple way to try to separate joint loans is through refinancing. Refinancing would legally and financially protect you if your ex doesn’t make payments after the divorce is final. You’ll need to apply to refinance the loan with the lien holder. Note that the loan might have been initially approved because of your combined income and credit scores. The lender will need time to evaluate your request by examining income, credit history, debt-to-income, and other factors before approving a refinance with either just your name or your ex’s name. It’s possible that your request to refinance will be declined because of this.
Joint credit card debt laws vary by state. In most cases, both parties are considered responsible for any debt accrued on a shared card, regardless of who made the purchases or payments. One way to address this is to close shared credit cards and move the remaining balances to separate cards in each person’s name.
Liquidate Your Assets
Liquidating your assets during divorce guarantees a clean financial division. Since you’ll be liquidating your assets with collateral such as a house or car, you’ll split the equity or proceeds from the sale. Before you decide to liquidate your assets, consult your lawyer first. When you liquidate your assets, you’ll be free from any financial negligence of your ex going forward. In some cases, you may owe money if your assets have depreciated over time. While this isn’t ideal, it still guarantees a clean financial split from your ex.
Pay Off the Debt
Another straightforward method to split your debt with your ex-spouse is to simply pay off any joint loans. You may also be able to then get a loan in just your name. Before you do so, contact your attorney and learn of any prepayment penalties from the lender.
For example, you’d get a new car loan or mortgage, and use those same funds to fully pay off your old loan that was under both of your names. If you want to apply for a new loan, be aware that your new application may be denied if you have too high of a debt-to-income ratio or a low enough credit score.
How Do I Financially Recover from My Divorce?
Regardless of what your divorce decree states, a lender will hold you accountable for any account under your name. If you two still have joint debt after the divorce, it’s important to keep track of the payments to avoid future issues. By setting up online access to accounts, you can ensure your contact information is up to date in case you lender needs to contact you. Plus, you can monitor the account balance to be sure that the balance is decreasing after your and your ex’s payments.
Evaluate Your Situation and Budget
At this point, your finances are separated from your ex-spouse with the exception of joint loans or alimony. Next, note your other minimum debt payments to guarantee you have enough income to pay for these expenses. If you can’t cover your individual minimum payments, consider a debt consolidation loan to make your payments more affordable. Then, note your current assets and retirement savings, as this money will remain yours.
Now that you have these key financial indicators, you can make a zero-based budget. Prioritize your minimum loan payments, basic living expenses, and savings in that order. By running the numbers, you may find that your income is too low for your expenses or savings goals. Consider temporarily increasing your income with another job or more hours at your current job to get yourself through this short-term hurdle and fuel long-term stability.
Start Your Emergency Fund
When you have room in your budget for savings, start saving for an emergency fund. To start, strive for a $1,000 starter fund. After you reach that milestone, keep saving until you have three to six months of expenses saved. While saving for an emergency fund may take several months, the alternative is taking out more debt in a future emergency, which will set you back even more.
Reduce Your Debt
Once you’ve rebuilt your emergency fund, you can strategically pay down your remaining debt. This only includes your individual debt and not joint debt with your ex. You can use the snowball method to pay off the smallest loan balance first or the avalanche method to pay off the loan with the largest interest rate first. Either way, both of these strategies require paying more than just the minimum loan amount so you can get out of debt faster.
Save for Retirement
Now that you have a plan to pay off your debt, you can look ahead to your long-term future and save for retirement. The easiest way to boost your retirement savings is to take advantage of your employer’s retirement plan. This may include a 401(k) or Roth IRA that your employer may match to a certain percentage. Some employers require you to work for the company for a certain number of years to be vested. This means that if you were to find a new job, they would remove their contribution to your retirement plan. For an option free from your employer, you can save with a Traditional or Roth IRA from Alltru.
Improve Your Credit Score
Due to emergency credit card usage or new loan applications, your credit score may be lower than where it was before your divorce. You can steadily improve your credit score by making your minimum loan payments on time. In addition, you can keep your credit utilization at 30% or lower to leave wiggle room in your finances in case your emergency fund isn’t quite enough. If you’re feeling strained from the toll your divorce took on your finances and don’t know where to start, talk to one of our Certified Credit Union Financial Counselors for help.
Adjust Your Income
As you begin to financially recover after your divorce, you may be facing an income gap or overwhelming pressure from loan payments. In these cases, a new job with higher pay or a temporary second job can help you gain stability. Adjusting to this new normal can be intimidating since it requires additional effort emotionally and physically. However, the short-term and long-term payoff can be worth it. Plus, you can build new connections with people rooting for you as you regain independence.
Stable Money Management Is Possible
Deciding to separate your finances, whether temporarily or permanently, is a tough decision, especially considering that your emotions, memories, and long-term plans are intertwined. By being aware of the red flags that should cause you to separate your money, you can protect yourself and your family if divorce is the outcome. Now that we’ve outlined the steps for you to financially survive a divorce, you know what to expect while navigating the process. Stable money management during and after a divorce is possible when you know what to do. Keep this as your guide for walking through your divorce and feel hope knowing that recovery is possible with the credit union that’s here for you.
